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GM's woes are just beginning
The automaker cut its profit outlook, and ratings agencies could push its debt to junk status. All this means that investors should stay away from the stock.
By Robert Walberg
General Motors' (GM, news, msgs) stock slumped 14% Wednesday after the company forecast a first-quarter loss and slashed its 2005 profit outlook. It would be a big mistake for investors to see the decline as a chance to buy a blue chip. The automaker is by no means a bargain.
Earnings are spiraling downward and visibility is very murky. Toss in the probability of a debt downgrade to junk status, and the possibility of a dividend cut, and the news cycle for GM is likely to remain bad for at least another three to six months.
A few weeks ago, I wrote that GM was unlikely to meet its earnings projections of $4 to $5 per share for this year, and that if it continued to disappoint the Street, the stock would be in for a crash. The company, which had expected to break even in the first quarter, now projects a per share loss of about $1.50. Management also slashed its full-year earnings estimate to $1 to $2 per share from $4 to $5.
Higher financing costs
To make matters worse, Standard & Poor's revised its credit rating on the automaker and its finance arm to negative from stable, opening the door to downgrading General Motors' debt to junk. Moody's noted that it, too, may downgrade the companys debt. This would raise the company's borrowing costs and dampen the prospects of the one business that had been doing reasonably well, its finance unit.
When I wrote about GM in early February, I noted that the company needed to take bold steps if it wanted to once again be considered among Americas corporate elite. My proposal was an aggressive move back into the defense industry with an acquisition of companies such as General Dynamics (GD, news, msgs) or United Defense Industries (UDI, news, msgs).
But there was nothing bold coming from management today. The company talked about the need to design better and more-popular cars and trucks, and it talked about needing to cut health-care costs even further.
While both steps would be a plus, neither will solve the company's structural problems. GM simply can't produce cars as cheaply as the competition, and margins are already razor thin. Management needs to think outside the box if it's ever going to solve the long-term problems confronting the company. Slashing costs and retooling designs will only take it so far. Even cutting the dividend, a likely step at this juncture, is only a temporary fix.
A new direction
Whether the company moves back toward the defense industry where it has dabbled both successfully and unsuccessfully, or whether it strikes out in a different direction, management must show imagination and daring before investors should even think about buying GM stock. Not the reckless daring of a Bernie Ebbers, but the vision and leadership of a Steve Jobs.
With valuations no longer compelling and the stock making new 52-week lows on a regular basis, theres just no reason to try and pick the bottom.
The stock has dropped by 22% since my first column, and until management comes up with something other than the usual boilerplate responses to fixing the companys problems, dont be surprised if General Motors sheds another 15% to 20%.
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